Friday, October 17, 2014

The 3rd Degree

Let’s say Jane makes Pies. She works from home and gets her flour from a regional mill that buys grain from Jane’s neighbor, Farmer Bob – Bob also raises the chickens that lay Jane’s eggs.  Jane grows rhubarb in her garden, buys apples from the local orchard, honey from the county bee-charmer and strawberries from the winery.  She packages her pies in recycled material and ships them to Plagman’s Grocery. When you walk into the grocery store and buy that delicious strawberry-rhubarb pie nearly 100% of its wealth stays at home.  And that, folks, is the third degree of multiplication.

Last week we talked about how $63 of every $100 spent locally is reinvested locally. 

This week we are talking about the “Multiplier Effect.” The Multiplier Effect can be roughly summed up thus: Not only does spending locally keep cash locally but it starts a domino of local spending that gives that original $63 the economic impact of $128 by the time it reaches the third local consumer/producer.

According to American Independent Business Alliance the total economic impact is determined by measuring three components: The direct, indirect, and induced impacts.

“Direct impact is spending done by a business in the local economy to operate the business, including inventory, utilities, equipment and pay to employees.

Indirect impact refers to the conventional multiplier that happens as dollars the local business spends at other area businesses re-circulate.

Induced impact refers to the additional consumer spending that happens as employees, business owners and others spend their income in the local economy.”

So, the First degree is retained cash; the second degree is the multiplier effect of direct, indirect and induced spending. What is the third degree?

The third degree is depth: If you can create a product locally with locally procured resources and sell it locally your community will retain nearly 100% of the wealth generated by the product.

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